ON THE CONTRARY

ON THE CONTRARY; Pay Taxes. Be Happy.

By Daniel Akst

Published: May 2, 2004

A CENTURY ago, Oliver Wendell Holmes Jr. observed that taxes are what we pay for a civilized society.

The price has gone up quite a bit since then. Today, American civilization is underwritten by a tax system that annually reallocates something like a third of gross domestic product. The system is insanely complex, chronically unfair and disliked by most taxpayers. Thus, it may not be immediately obvious that what the American economy needs most right now is more taxes. Voters should demand them. Businesses should lobby for them. Kids should write to Santa, requesting them for Christmas.

Why should any taxpayer hope for higher taxes? The simple answer is that you're not just a taxpayer. You're also a wage earner, an investor, an entrepreneur, a parent, a retiree or some combination. And if Uncle Sam does not raise your taxes in the next few years, you could suffer from an economy plagued by rising interest rates, capital shortages that result from vast government borrowing and retarded productivity growth that will make all of us poorer. As Milton Friedman put it, ''Inflation is one form of taxation that can be imposed without legislation.''

We'll need higher taxes no matter which party is in power, because government spending in the years ahead is certain to increase. Despite a Republican administration and a Republican-controlled Congress, spending is already up. Now add in the nation's enormous unfunded retirement liabilities, accompanied by unfavorable demographics: there will be far fewer workers per retiree in the future than there are now. Politically, those retirees will be a fearsome bunch, likely to demand and receive costly new benefits, like the recently enacted Medicare prescription drug plan. Because of medical advances, they will live longer than ever at greater expense.

Then there is the Pentagon. President Bush's proposed spending of $420 billion for military purposes for fiscal 2005 heralds large increases for years to come. And, of course, persistent deficits and rising interest rates, both visible on the horizon, will mean more spending on debt service.

So will taxes rise in the future? The good news -- and yes, this really is good news -- is that they almost certainly will. But the near-inevitability of higher taxes means it is wise to change how you handle your money today. Paradoxically, higher taxes have some of the same practical implications for investors as yawning deficits. Take long-term bonds. If taxes go up, bonds producing taxable income can be expected to suffer. But if taxes do not go up, interest rates will probably increase all the more, something that will still hurt those same long-term bonds. Assuming taxes do rise, municipal bonds on which the interest is tax-exempt may be the way out of this conundrum.

Stock investors face their own travails. The corporate tax burden has declined sharply in recent years. According to the General Accounting Office, more than 60 percent of American corporations paid no federal tax for 1996 through 2000, when profits were growing. These figures will make corporations a fat target for revenue-hungry politicians, and one result will be lower corporate after-tax profits. This will be reflected in lower returns for investors, the folks who get taxed when corporations pay. If higher taxes keep interest rates down and stabilize the economy, stock investors should benefit.

In the short run, the prospect of higher taxes may make you think twice about aggressively putting money into tax-deferred retirement accounts; funding them later, when taxes are higher, may be preferable as long as you are confident that your prudence and discipline will not result in paying even more taxes years from now, when America's retirement expenses become overwhelming. Meanwhile, with the federal tax rate on long-term capital gains at a maximum of 15 percent -- as low as it is likely to go in our lifetime -- this may be a good time to sell appreciated securities.

When income taxes are rising, real estate can be attractive, offering continuing tax deductions and appreciation that is not taxed until the property is sold. Look for gains in states with a low cost of living, low state tax burdens and low levels of precipitation. (Americans prefer sunny climes.) Higher income taxes are never cause for glee. We would be better off with a hefty new levy on gasoline, which would offer many environmental, geopolitical and safety benefits. But don't bet on it. Expect instead more of the same complex hodgepodge of income, sales and property taxes, whatever gets the job done. And pay them with a smile. The alternative, after all, would be far worse.

Daniel Akst is a journalist and novelist who writes often about business. E-mail: culmoney@nytimes.com.